Navigating Virginia’s Fixed-Date Conformity Key Decouplings from the OBBBA in 2026
The 2026 tax year is a pivotal one for Virginia taxpayers, driven by the Commonwealth’s significant shift in how it aligns with the federal tax code. This change, enacted through House Bill 29, moves Virginia from a system of “rolling conformity” to a “fixed-date conformity” with the Internal Revenue Code (IRC) as it existed on December 31, 2025 . This transition, while adopting many provisions of the federal One Big Beautiful Bill Act (OBBBA), deliberately decouples from several key tax benefits, creating new complexities for individuals and businesses . For the many professionals, entrepreneurs, and high-net-worth individuals in the DC metro and Northern Virginia area, understanding these differences is crucial for effective tax planning and avoiding unwelcome surprises .
The Core Change: Fixed-Date Conformity
Historically, Virginia automatically adopted most federal tax changes. Under the new fixed-date model, the state is now tied to the IRC as it stood on a specific date, meaning future federal changes will not automatically apply unless the General Assembly takes specific action . The Virginia Department of Taxation has made it clear that taxpayers benefiting from federal provisions from which Virginia has decoupled “must maintain separate Virginia records and calculate depreciation, amortization, carryforwards, and adjustments as if [OBBBA] changes had not been enacted” . This means that for the 2025 tax year (filed in 2026), many taxpayers will need to track and report their federal and state tax positions separately, potentially requiring amended returns .
Key OBBBA Provisions Virginia Has Decoupled From
Virginia has specifically decoupled from several major business-friendly provisions of the OBBBA. This means that while you may benefit from these provisions on your federal return, you likely cannot claim the same benefits on your Virginia return. The key decouplings include :
Research and Experimental (R&E) Expenditures (IRC §174A): The OBBBA allowed for immediate expensing of domestic R&E costs. Virginia has rejected this, requiring that these costs continue to be amortized over five years for state purposes . This creates a significant, permanent timing difference for technology firms, government contractors, and other innovation-driven businesses that are prevalent in the region.
Section 179 Expensing: While the federal government significantly increased expensing limits, Virginia has decoupled from the OBBBA’s increased dollar limitations for expensing certain depreciable business assets under IRC Section 179 . Virginia businesses must now calculate their state deduction using the prior, lower federal limits.
Bonus Depreciation: The law also clarifies that Virginia will continue its long-standing policy of decoupling from the federal bonus depreciation provisions under IRC Section 168(k) .
Business Interest Deduction (IRC §163(j)): A particularly impactful change is the reduction in Virginia’s deduction for disallowed business interest expenses. For tax years beginning on or after January 1, 2025, the state deduction decreases from 50% to just 20% of the interest disallowed on the federal return . This is a critical change for businesses with significant leverage, including many in the real estate and investment sectors.
Virginia Has Adopted Other Federal Provisions
It is important to note that Virginia has conformed to many other OBBBA provisions. The state has adopted the majority of the law, meaning that Virginia taxpayers will benefit from the increased standard deduction and the federal deductions for tips, overtime, car loan interest, and the enhanced senior deduction for the 2025 tax year . Additionally, the standard deduction for Virginia is currently set at $8,750 for single filers and $17,500 for joint filers .
The PTET Is Now Permanent
A significant win for pass-through entities (S-Corps, partnerships, and LLCs) is that HB 29 permanently extends Virginia’s elective Pass-Through Entity Tax (PTET) . This tax allows eligible business owners to avoid the federal $10,000 cap on state and local tax (SALT) deductions by paying state income tax at the entity level. The permanent extension provides long-term planning certainty. The law also makes permanent the provision that substantially similar out-of-state PTE taxes are deemed paid by the individual owners for purposes of Virginia’s PTET credit .
Legislative Proposals to Watch
The 2026 Virginia General Assembly session also saw several other proposals that would have significant impacts if passed, including:
Sales Tax Expansion (HB 900 and HB 978): These bills aimed to broaden Virginia’s sales tax base by extending it to many currently exempt personal services and digital products. While professional services (including accounting) would remain exempt, the expansion would affect many service-based businesses and their compliance systems .
High-Income Tax Proposals (HB 979, HB 1074): Several bills proposed additional taxes, such as a surtax on higher-income individuals (often targeting income above $1 million) or new taxes on investment income like capital gains and dividends .
Market-Based Sourcing: A significant proposal in the budget includes a transition from Virginia’s outdated “Cost of Performance” method to a “Market-Based Sourcing” method for apportioning corporate income. This would bring Virginia in line with most other states and protect in-state businesses from double taxation .
Conclusion
Virginia’s shift to fixed-date conformity and its deliberate decoupling from key OBBBA provisions create a new, more complex tax environment. For businesses and high-net-worth individuals in the DMV area, this reinforces the need for sophisticated, year-round tax planning that carefully considers both federal and state implications. The permanent extension of the PTET offers some relief for pass-through entities, but the overall landscape requires close attention to legislative changes and proactive financial management.
